Printer Friendly

DO-IT-YOURSELF RETIREMENT CONTROL ACCOMPANIED BY RISKS.

Byline: Evan Pondel Staff Writer

The last thing Paul Elis wants to worry about is his hard-earned money being shuffled around by a mutual fund manager he has never met.

So when it comes to his retirement portfolio, Elis opts for a ``self-directed IRA,'' a tool that allows savvy individual investors to supercharge their retirement accounts - but could backfire in the hands of novice moneymen.

``It is not for everyone,'' said Elis, 59, who manages a fund comprised of mortgage companies from an office in Calabasas. ``And people should not be encouraged to do entrepreneurial investing in an IRA unless they are absolutely secure in what they are doing.''

Self-directed Individual Retirement Accounts have been around since the mid-1980s, but are growing in popularity as fears of dwindling Social Security checks and modest stock market returns prompt people to start looking elsewhere to grow their retirement portfolio.

Managing self-directed IRAs is a lot more labor intensive than sitting back and letting Wall Street firms do the work, because they can be invested in anything from real estate to small businesses. Still, investors who want control of their retirement money say self-directed IRAs have more upside potential than traditional IRAs.

While there are no figures that track the growth of self-directed IRAs, analysts say they have become more popular in recent years.

Elis began investing in a self-directed IRA decades ago with the intention of growing his wealth. ``I was a young guy at the time and I thought if I could put a few thousand dollars away to grow tax deferred it was as good as sliced bread,'' said the self-proclaimed entrepreneur whose IRA is invested in mortgages.

But it appears real estate is the investment du jour of self-directed IRAs at the moment as investors look for creative ways to take advantage of a robust housing market. Section 408 of the Internal Revenue Code states that individuals can purchase property or real estate contracts with funds held in IRAs. Self-directed IRAs can be invested in almost anything except life insurance, artwork, antiques, metals, gems, most coins and S corporations, companies that are exempt from federal income tax.

When investing in real estate, a custodian essentially purchases the property for the investor. The value of the home is then accounted for in the IRA, which appreciates according to the going market rate of the home. Fees are usually assessed when the property increases in value or when contributions are made.

Aside from real estate, some investors fund small businesses through an IRA. Oftentimes, an investor will roll over money from a 401(k) into an IRA and use the money to support a business.

The most significant advantage of rolling money into an IRA, whether it is earmarked for real estate or a small business, is the ability to avoid capital-gains taxes.

The problem, experts say, is that poorly managed self-directed IRAs can self-destruct.

Ed Slott, author of ``Parlay Your IRA into a Family Fortune,'' refers to self-directed IRAs as ``onus-on-you'' investments. The reason: Investors do not have the assistance of analysts and brokers when they take on the responsibility of a self-directed IRA.

``And most people are better off with a traditional kind of investment with a lot of professional hand-holding,'' said Slott, who runs IRAHelp.com.

Another risk of a self-directed IRA is that the investor might not have the financial know-how to understand the tax implications. For example, investors face huge tax consequences if they use IRA money incorrectly, such as purchasing a home they already live in.

So before even thinking about a self-directed IRA, investors must understand their financial goals, said Bert Hansen, a representative at Primerica in Eagle Rock, a financial advising subsidiary of Citigroup.

For one thing, those thinking about managing their own IRA should ask themselves a couple of key questions: How much money do I need to retire? And what kinds of investments can get me there?

``Diversification is ultimately key, especially if the market goes down, and your IRA is invested in real estate,'' Hansen said.

Once the decision is made to go self-directed, investors should seek an administrator who offers the following products: bank CDs, mutual funds, trust deeds, unsecured notes, annuities, treasuries, stocks and real estate, according to IRA Resource Associates Inc., a Camas, Wash.-based company that connects investors with self-directed IRA administrators.

Investors should also factor the cost associated with the administrator. Some administrators are fee-based, meaning they charge every time a transaction is made. While others are asset-based, and the administrators charge a percentage of total assets on an annual basis. IRA Resource Associates found that annual fees charged by administrators can range from $285 to $1,362 when investors have an asset base of about $100,000 - considerably more than a standard retirement account.

Several California companies act as administrators, but investors are encouraged to seek a referral before committing to a given firm.

Among the most popular in California are Pensco Trust Company, Polycomp Administrative Services and Entrust Administration Inc.

Elis said he is a client of Polycomp, which specializes in self-directed IRAs. But brokerages and money managers can administer self-directed investments as well.

The only caveat when searching for someone to manage a self-directed IRA is that the investment's performance is virtually impossible to track, said John Coumarianos, a mutual fund analyst with Morningstar, an investment research firm in Chicago. ``You also want to think about the liquidity of the investment and its asset class.''

Also, if purchasing a property for your IRA sounds like too much of a task, Coumarianos said you could consider a good real estate mutual fund.

Evan Pondel, (818) 713-3662

evan.pondel(at)dailynews.com

CAPTION(S):

drawing

Drawing:

(color) RETIREMENT

Warren Huskey/Staff Artist
COPYRIGHT 2006 Daily News
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2006, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:Business
Publication:Daily News (Los Angeles, CA)
Date:Feb 5, 2006
Words:958
Previous Article:SIMI DMV TO CLOSE IN SUMMER FOR UPGRADES.
Next Article:PHILANTHROPIST PUTS EDUCATION FIRST WITH CSUN ENDOWMENT.


Related Articles
The layoff blues: forced to downsize? Here's what you need to know to avoid the legal minefield.
5 alternatives to layoffs.
Single & free: lay the foundation for your financial future while you are relatively free of obligations.

Terms of use | Copyright © 2017 Farlex, Inc. | Feedback | For webmasters